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***: S"**



KO OP MAN IKE S T







THE LIBRARY

OF

THE UNIVERSITY
OF CALIFORNIA

LOS ANGELES




SOUTHERN BRANCH

UNIVERSITY OF CALIFORNIA
LIBRARY

LOS ANGELES. CALIF.



Library

Graduate Sc^ >ol of Business Administration

University of California
Loa Angeles 24, California



FUNDAMENTALS OF
ACCOUNTING

Principles and Practice of Bookkeeping

By

S. BERNARD KOOPMAN, M.S., M.C.S.

Head of Department of Accounting and Law, Theodore Roosevelt

High School of the City of New York; Member of Staff, Accounting

Department, Columbia University; Certified Public Accountant

And

ROY B. KESTER, PH.D.

Associate Professor of Accounting, Columbia University School of

Business; Author of "Accounting Theory and Practice" in three

volumes ; Certified Public Accountant

IN TWO VOLUMES
VOLUME I




Second Printing
NEW YORK

THE RONALD PRESS COMPANY

1922

40061



Copyright, 1921, by
THE RONALD PRESS COMPANY



All Rights Reserved



Bus. Admin.
Library

HF



KO



PREFACE v.

THIS work represents an endeavor to provide suitable text

^ material covering the basic principles of accounting and book-

keeping practice in convenient form for instruction by the class

' method. It is the result of years of experience both in the class-

-room and in business and its methods have brought uniformly

' good results.

The material here presented is designed as a one-year course

fpioT students beginning the subject. Since a student's use of

,4 the general principles of accounting depends on his ability to

4 apply them intelligently, his basic training is of vital impor-

tance. His first steps must be taken with care. In this treatise

the correct point of view is held constantly before him, the

J' subject being developed logically and easily in a well-graded
course. Ample drill material is provided at the end of each
chapter in the form of carefully graded problems to fix the
principles treated. Not all the problems in every chapter may
jjbe required for every class. It is suggested that the teacher
3 proceed with the new chapter as soon as the pupils can apply
(L the principles discussed.

A second book is in course of preparation and will be ready
within a year. The two books will present the materials usually
covered in high school courses.

This text had its inception in the course, Methods of Teach-
ing Bookkeeping and Accounting, given since 1916 to public and
private secondary school teachers in the summer session at
Columbia University. It forms the basis for the work in the
Theodore Roosevelt High School where the members of the
teaching staff have tested it out successfully and have secured
excellent results.



111



iv PREFACE

The authors desire to express their appreciation of the assist-
ance rendered by Miss Edith Fremdling and Mr. John Jaffe in
the preparation of part of the practice material. They are under
obligation, also, to the many business houses and banks that
extended every courtesy in the use of business forms in this text

S. B. KOOPMAN
R. B. KESTER
NEW YORK CITY,
October 15, 1921.



INTRODUCTORY

In a current survey of commercial education in the public
high schools of the United States it is stated that the commercial
course is a "technical training course giving instruction in
mechanical routing"; that it is an "inheritance from the busi-
ness college"; that it is an "attachment, not a coalescence to
the old high school"; and finally that it is "utilitarian, not
social" in its aims and ideals. Only within a very few years
has there been even a partial appreciation of the real status of
commercial education in the public high schools. This indict-
ment applies in full to bookkeeping, which has always formed
the backbone of the commercial course. The teaching of book-
keeping has been seriously handicapped not only by the difficulty
of securing professionally trained teachers but by the lack of text
material organized to develop fundamental principles through
reasoning.

A recent syllabus in bookkeeping gives the aims of the course
as four, viz. :

1. To develop the fundamentals of accounting.

2. To teach the art of bookkeeping.

3. To give instruction concerning business practice.

4. To develop the mind, particularly the analytical and

imaginative abilities.

The authors of this text are in agreement with these aims',
but prefer to state the purpose of bookkeeping instruction as the
development of mental capacity by means of, and in relation to,
the first three aims above tabulated. So-called education that
does not stimulate the student to the free use of his mental
equipment is spurious, and its inclusion is a criminal waste to be
condoned only on the ground of ignorance, never on the ground
of expediency.



vi INTRODUCTORY

Heretofore bookkeeping has been studied primarily to fit the
student to record information which the business man has found
useful in conducting his business, the bookkeeper being a mere
recorder or mechanical operator who acquires skill and accuracy
by recording, day after day, information of the same type. Small
wonder, then, that bookkeeping has been called a "blind alley
job," that it has been referred to as monotonous, deadening,
mechanical work with but slight chances of promotion! Small
wonder, then, that it is said to have little educational value!

The trouble is not in the subject matter, but in the manner of
its presentation. The mechanical side has been emphasized as
the great aim of the subject. Accordingly, those whose minds
ran to order, neatness, carefulness, and detail were quite success-
ful through following the rules provided by some mechanical
recorder. But the successful bookkeeper usually remained a
bookkeeper all his life, while a person who studied bookkeeping
but did not practice it obtained practically no benefit from
his study except a knowledge of business customs picked up
incidentally.

A great deal of attention has been given to penmanship and
arithmetic as aids in correctly gathering business data. They,
however, only obscure the real educational value of bookkeeping
when taught during the bookkeeping recitation and can be taught
much more effectively as separate subjects. One never thinks
of placing any emphasis on penmanship in teaching story- writing
the means of recording is always secondary. Just as we expect
the student to write a legible hand, so we expect him to know ele-
mentary arithmetic, including simple percentage and interest
calculations.

The value of bookkeeping training must be judged from two
standpoints educational and vocational. It is doubtful whether
any subject can be allowed a place in the school curriculum
solely on a vocational basis. It must also possess educational
value in large measure. If properly presented, bookkeeping has
a distinct educational value, and will develop the student's



INTRODUCTORY vii

reasoning powers in regard to business affairs, because book-
keeping is applied economics. It is vocational only because of
its subject matter. It is intensely practical, but that, instead of
detracting from its educational value, should largely increase it
because of the element of interest involved. This interest is too
often killed by the mechanical methods used in teaching the sub-
ject. Not the recording, but the effect of a business transaction
on the financial affairs of a business should be emphasized. The
record-making, while important, is only incidental. The real
educational value of bookkeeping comes from the development
of the student's ability to form correct judgments as to the finan-
cial effect of the operations of a business unit. This, the manage-
ment viewpoint, is the important thing for the student's future
growth. The student no longer looks to the collecting of informa-
tion as an end in itself, but only a% a means of directing the
operation of the business more effectively. His viewpoint is
larger; it is that of the manager or executive instead of the
recorder or bookkeeper. ,

What, then, is the best method of presenting the subject to
secure the desired results? Psychologists maintain that a per-
son works more intelligently and with greater interest if he knows
the goal toward which he is headed, i. e., the mind forms a better
concept of the new thing by studying it as a unit first, then sepa-
rating it into its parts, studying each part in its relation to the
whole, and finally building up the whole from its parts. This
method proceeds from the general to the particular and then
from the particular to the general. By this method a general
rule is deduced which the student uses in determining the
relation of the parts to the whole.

Not the mechanical or the logical order, but the pyschological
order of presenting the subject should be followed. The ma-
terial is arranged in such order that the mind can grasp the new
concept most easily and interpret (apperceive) it most completely
in terms of related concepts already in the mind. In teaching,
old related material should be recalled before the new matter is



vill INTRODUCTORY

presented. It is generally understood that only one new thing
should be presented at a time. The new thing should then be
associated as closely as possible with the old related material,
after which should follow a generalization or summary for the
purpose of placing the particular item in a general class. This
generalization or summary often takes the form of a rule or
principle. Finally the new concept should be fixed in mind by
means of application or drill.

The Equation Method used in this text is an attempt to
present the fundamentals of accounting in psychological order.
This method emphasizes the organization and management
viewpoint, stressing the effect of business transactions rather
than aiming at mechanical dexterity in recording them.

The personal possessions and debts of the student are taken
as the foundation upon which to lay proper concepts of things
owned (assets) and things owed (liabilities). The student is
personally interested in these, and therefore grasps their new
relation more easily than if the approach were in connection with
things of others. When the student once knows how to deter-
mine his own financial condition, he can easily apply the same
principles to the financial condition of business enterprises. Ac-
cording to this plan, the small business of an individual owner is
considered and his proprietorship interest is measured by means
of the basic equation: Assets minus liabilities equals capital. A
statement of his financial condition as of a later date is then
prepared.

A comparison of his proprietorship as of the two dates will
show that a change has occurred. Realization that the causes of
such changes are not apparent leads naturally to inquiry for
other data that will give causes. To obtain this additional in-
formation comprising the income and expenses of business opera-
tion, records must be kept. The most complete and satisfactory
record consists of double-entry books of account, which contain
all changes in assets and liabilities and so provide the desired in-
formation concerning income and expenses. The process thus



INTRODUCTORY ix

naturally works back to the ledger which furnishes this classified
information, after which the journals or books of original entry
are introduced as devices for collecting the desired information.
Thus at every step the goal is in sight and the relation of the new
devices introduced to the fundamental equation is easily dis-
cernible. This is accomplished through the constant insistence
that each transaction be explained in terms of assets, liabilities,
and proprietorship. The student thus obtains a comprehensive
knowledge of the accounting procedures required for a small,
simple business unit during an accounting period. Since all
succeeding work consists merely of more complex applications
of the same principle, the student can easily understand the new
work. There is continuous interest because new items classes
of assets and liabilities and subdivisions of proprietorship are
being added one at a time. The student's attention is every-
where directed toward the economic rather than the mechanical
aspect of the subject.

Depending on the amount of study devoted to the subject
the student will acquire such a knowledge of business data and
the ability to record and interpret them as will enable him to act
as a bookkeeper or office assistant. Since the great majority of
those entering business, however, either never become book-
keepers or do not continue as bookkeepers, the emphasis in teach-
ing should be placed on the general grasp of financial problems,
rather than upon mechanical recording. Principles must, how-
ever, always be given ample application before the process of
teaching is complete. Some practical applications of accounting
can be taught without teaching accounting, but the student
secures only a one-sided view and is therefore likely to make
wrong judgments. He does not know how the operations which
have taken place in the various departments of the business
have produced the figures found in the different financial state-
ments. Therefore the subject cannot be taught effectively by
eliminating all mechanical recording.

Principles without practice are vain. Practice based on



x INTRODUCTORY

rule-of- thumb and not on logical principles can never be sure of
itself. The authors have, therefore, attempted to develop a
textbook for the beginner based on a proper balance between
these two essential elements. To supply a text providing in-
struction from the standpoint of a class recitation rather than a
mere laboratory exercise has been an aim kept constantly in view.
The laboratory method is a holdover from the time of the ap-
prentice system when one could learn only by doing. It is
narrowing, wasteful, and non-educational, and can be defended
only where the instruction material has not been sufficiently
organized for proper presentation in the classroom. The method
of the class recitation comprising a simple and psychological
development and discussion of basic principles together with a
careful application of them should be used in teaching bookkeep-
ing just as in teaching mathematics, science, or language. Plenty
of practice problems should be required of the student to make
sure of his grasp of principles. The student is therefore given
home or study assignments both of text matter and of practice
problems.

The authors believe that teachers of bookkeeping all over the
country are awakening to the needs of the situation and are
equipping themselves for better service by home and continuation
study in schools of commerce.



CONTENTS



CHAPTER
I

II

III

IV

V

VI

VII

VIII

IX

X

XI

XII

XIII

XIV

XV

XVI

XVII

XVIII

XIX

XX

XXI

XXII

XXIII

XXIV

XXV

XXVI

XXVII



PAGE

i
ii

22
27

39
54
69
80

94
107

142
161

The Journal 191

Ledger Closing by Means of the Journal . . . 211

Accruals 228

Interest 242



Why Study Accounting ?

Business, Accounting, and Proprietorship

The Accounting Equation

Classification of Assets and Liabilities
Valuation of Assets and Liabilities ....

Causes of Changes in Capital

Comparative Statements of Financial Condition

Development of the Equation

Expansion by Substitution

Expansion by Substitution (Continued) .
Further Applications of Expansion by Substitu-
tion The Ledger and the Trial Balance
The Financial Statements Closing the Ledger



Discounts Trade and Cash . . . .
Labor-Saving Methods The Purchase Journal

The Sales Journal

The Cash Receipts Journal

The Cash Disbursements Journal

The Cash Book

The General Journal

Business Papers The Goods Invoice .
Negotiable Instruments Promissory Notes .

Banks and Their Functions

Bills of Exchange Drafts



273,
291

308
321



359
373
399
423
457



FORMS



FORM PAGE

1. (a) Graph of Comparative Financial Condition 72

(b) Comparative Graph of Total Assets, Liabilities, and Capital . 73

2. Standard Form of Ledger Account 148

3. (a) Trial Balance of Totals 153

(b) Trial Balance of Differences 1 53

4. (a) Balance Sheet Report Form 165

(b) Balance Sheet Account Form 166

5. Statement of Profit and Loss 167

6. (a) Standard Form of Journal with Date Above the Debit and

Credit Position 195

(b) Standard Form of Journal with Date Column to Left . . . . 196

(c) Standard Form of Journal with Folio Column to Left of the

Debit and Credit Position 196

7. (a) Purchase Journal Old Form 299

(b) Purchase Journal New Form 301

8. Sales Journal 314

9. Cash Receipts Journal 324

10. Cash Disbursements Journal 334

11. Cash Book 346-349

12. Simple Form of Invoice 375

13. Various Styles of Invoices 378

14. Receipted Invoice 381

15. Separate Receipt Form 382

16. Express Receipt 385

17. Straight Bill of Lading 387

18. Credit Memorandum 388

19. Statement of Account 389

20. (a) Promissory Note without Interest 402

(b) Promissory Note with Interest 402

21. (a) Forms of Unqualified Indorsement 405

(b) Forms of Qualified Indorsement 405

(c) Forms of Restrictive Indorsement 405, 406

22. Note Showing Indorsements 407

23. Note Receivable 410

24. Note Payable 411

25. Certificate of Protest 414

26. Notice of Dishonor 415

27. Deposit Ticket 430

28. (a) Check Payable to " Cash " 432

(b) Draft Form of Check 433

(c) Check for Less than One Dollar 433

29. Pass-Book Balanced 436

30. Bank Statement of Account 437

3 1 . Form of Check Book Showing Reconciliation 440

32. Certified Check 443

xii



FORMS xiii

FORM PAGE

33. Cashier's Check 444

34. Certificate of Deposit 444

35. (a) Sight Draft . 461

(b) Time-after-Sight Draft Accepted 461

(c) Time-after- Date Draft Accepted 462

36 Collection Draft . . . 465

37. Order Bill of Lading ... ... , . . . 467

38. (a) Trade Acceptance Approved by Federal Reserve Board . . 475
(b) Trade Acceptance Approved by American Acceptance Council 476

39. Bank Draft . ... . ... 479

40. Post-Office Money-Order 479

41. Express Money-Order . 479



FUNDAMENTALS OF ACCOUNTING



CHAPTER I
WHY STUDY ACCOUNTING?

Education as a Preparation for Life. In our country, where
every boy and girl is familiar with the system of public education,
it may seem hardly necessary to state that the purpose of educa-
tion is to prepare one for his life's work. From the beginning of
our country's existence one of her chief aims has been the educa-
tion of her youth. Almost all states have compulsory education
laws in accordance with which a boy or girl must continue in
school until he has attained a certain age or a certain grade in his
school work. When one compares men in various walks of life,
one cannot help noting that a very large percentage of the success-
ful men in a community are educated men.

Of the boys and girls who finish the eighth grade, not more
than 20% finish the high school course; and of those who finish
high school only a very small percentage finish a course in college.
While we have notable examples of men deemed successful in life
who have not had a college education, yet it is recognized that in
our present-day civilization an educated man has a much better
chance of success than a man without education.

As to what constitutes a successful life, opinion of course
differs. One man may set for himself the acquiring of a large
fortune. If he falls short of his goal, he will not consider himself
successful. Another man may set for himself perfection in music
or painting. Unless he attains the standard of perfection set for
himself, he will not consider himself successful, although by
others he may be proclaimed an artist. Success is often measured
in terms of happiness. Ethical values are often considered the



2 FUNDAMENTALS OF ACCOUNTING

measure of success. It is frequently said that a man who has
given the most of himself to the community, that is, to the
civilization in which he lives, gets the most of real satisfaction
out of life. Certainly, when measured by this standard of success,
education is a necessary preparation for a successful life.

In its broader sense education should not be limited to the
training acquired in the schoolroom, but should be looked upon
as a continuous process. The habits of thought and the training
that one acquires in the classroom should be carried into every-
thing done after the formal school life is over. When so viewed
everything a man does may be used for educative purposes.
Unless education is something more than a cloak to be put on or
laid aside at will, there is little of permanent value in it.

The fundamental purpose in education is to teach the learner
how to use his mental abilities in making the most of the life and
civilization in which his lot is cast. Development of any sort,
be it of muscle or of mind, can come only from use. The start
which one acquires in school should be looked upon simply as a
start. Habits are formed and methods of using one's abilities
are acquired which, unless developed through daily use, will
soon become of no value. What particular place one may fill in
the life of one's community is always a most important question
and one which faces every boy and girl of high school age. It is
proposed in this first chapter to point out some of the kinds of
work which may prove attractive to high school students.

Vocations as Forms of Service. In the earlier history of the
human race it is supposed that every man, or at least every family,
was more or less self-supporting and self-sufficient. Each family
made all of the things necessary to secure the best kind of a living
possible in those days. Building a house for shelter, making
clothing, getting food all these were done by each family for
itself. As civilization advanced and men became more dependent
on one another, divisions of labor developed. In this way one
group of men did certain things for which they were best fitted,



WHY STUDY ACCOUNTING? 3

and furnished certain necessaries to their fellow-men, who in turn
did other things for which they were best fitted, and so furnished
some of the other necessaries of life. Thus the many duties and
tasks which have to be performed to make living satisfactory were
divided and men began to specialize, that is, they limited them-
selves to one kind of work instead of trying to do all kinds. In this
sense, then, a man's work or his vocation may be said to consist
in or arise from the services which society has to have performed.

Choosing a Vocation Early. Because of the way in which
society is constituted at the present time, boys and girls growing
up into manhood and womanhood must prepare to take their
places in the various vocations of life. Which vocation will be
best for each is the greatest problem that faces any boy or girl.
It is, indeed, a very unhappy situation to find yourself, like a
square peg in a round hole, unfitted for the task confronting you.
Happy is the youth who can settle early in life the position or
vocation he desires to enter and can then train himself definitely
with that end in view. There is always a waste of effort and 'oss
of time in changing about from one thing to another until one at
last finds the particular vocation for which he thinks himself
best fitted. We shall try now to give the student an idea of the
main vocations or kinds of service which life today requires to be
performed.

Classification of Vocations. Vocations may be broadly
divided into two groups, public and private.

I Public Group

i. Government Service. Under this head are found three major kinds
of services:

(a) Legislative, which concerns itself with law-making. .

(b) Judicial, which concerns itself with the interpretation and

meaning of the laws.

(c) Executive, which concerns itself with the carrying out of the

laws. Under each of these branches of government service
there are many bureaus and departments. The Post-Office



4 FUNDAMENTALS OF ACCOUXTIXG

Department, the Farm Bureau, the Interstate Commerce
Commission with its man}' activities, the Federal Trade
Commission, and the Consular Service are examples of the
many different kinds of governmental service.

2. Religious Service. This includes services which the church and

allied societies perform.

3. Educational Service. This includes both public and private schools

and all formal educational activities wherever found, such as
employees' training classes in banks and other corporations, gov-
ernment bureaus, etc.
II Private Group

1. The Professions, under which are included the vocations of medicine,



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